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Lord Sainsbury of Turville: I speak to Amendments Nos. 111, 113, 114, 115 and 119. Perhaps I may take together Amendments Nos. 111 and 119 as they seek to introduce what I would characterise as a "de minimis" provision. They would have the effect of preventing the OFT and the Competition Commission from taking any action against mergers in markets below a certain size.

Clause 21(2) of the Bill gives the OFT a discretion not to refer a merger where the market or markets concerned are not of sufficient importance to justify making a reference to the Competition Commission. The issue raised by the amendments is whether to introduce a formal and more absolute de minimis provision or to rely on the OFT and the commission to exercise their judgment sensibly having regard to the guidance that both will be required to publish under Clause 103 of the Bill.

De minimis thresholds are tricky because all markets are different and at different stages of economic development. Some may be declining, about to be superseded by new technology. The current size of such a market might not be a reliable indicator of its economic importance. Conversely, a small market in an emerging technology may have considerably greater longer term significance such that a reference would certainly be justified. We think, therefore, that it would be better to leave the authorities discretion to make their own judgments in this area, which is what the term "sufficient importance" is intended to allow for.

I turn now to the amendments concerned with the jurisdictional tests for the new merger regime. The jurisdictional tests are ones that determine whether a merger is subject to merger control regulations.

I deal first with Amendment No. 113. The amendment seeks to raise the UK turnover threshold of the target company from 45 million to 70 million. I understand that the concern is that the 45 million figure would overload the OFT with benign cases and

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would prejudice the system against, for example, new technology companies with small asset value but high turnover.

The 45 million figure was derived from data research we undertook in my department. Briefly, the figure is based on an analysis of the assets and turnover levels of 110,000 UK companies. Our intention was to find a figure that we believed would account for roughly the same number of companies as is currently the case under the assets test.

What we have is an informed estimate. One needs to be clear about that. I do not accept that there is anything to be gained from replacing one informed estimate with another less informed one. Further, I do not believe that a direct comparison can be made between the value of assets and the value of turnover, especially considering that 70 million assets is a world-wide figure and 45 million turnover is limited to the UK.

However, we acknowledge that some unease exists about the level of 45 million. We think that our evidence supports it but we are willing to look at it again to reconfirm what would be an appropriate figure for the turnover test. In particular, we would be grateful for any suggestions from interested bodies on how the figure should be derived. In the light of this commitment, I hope that the noble Lord will be prepared to withdraw the amendment.

Amendment No. 114 seeks to replace the current jurisdictional definition of share of supply with a definition based on "market share". A similar amendment was put forward in another place. I echo again the reasons why we think that the share of supply test is the right test for our merger regime. It has the characteristics of being a simple, transparent and easy to apply test that is appropriate for a jurisdictional threshold. Calculating the more economically substantive market share test would be an extra burden on both business and the OFT. That is why we have not been pressed to make this change in any of the consultations we have run.

Amendment No. 115 seeks to make clear that a relevant merger situation does not include mergers that have no impact on the UK or part of it. Again, a similar amendment was put forward in another place. In those debates we sought to reassure honourable Members that the Government share the view that the activities of our competition authorities should be focused on mergers that have a direct impact on the UK markets.

The amendment was rejected because we consider that it is not necessary. That is because the new design of the jurisdictional tests ensures that they are concentrated on the UK markets. The share of supply test must be applied to the UK market or, as the case may be, a substantial part of it. The new turnover test will measure the turnover of the target company in the UK. It replaces an assets test which took account of world-wide assets.

We share, therefore, the sentiments behind the amendment but I hope that noble Lords are satisfied that the legislation as currently drafted does deliver the

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UK-focused regime that is intended. With those explanation, I hope that the amendment will not be pressed.

6.45 p.m.

Lord Hunt of Wirral: I shall want time to consider the Minister's response. I was interested to hear his remarks on Amendment No. 113. It is necessary to make a judgment as to the correct level. I have been unable to peruse the data research to which he referred. I am not sure whether it is publicly available. If the Minister were to consider sharing it with noble Lords, we could then judge whether 45 million is a better guesstimate than 70 million. I have not had access to detailed research. I do not know whether the Minister wishes to intervene. He seems of happy countenance at the suggestion that he might make the data research available.

Lord Sainsbury of Turville: I can see no reason why we would not make that available. However, I have described the nature of the information. The data suggests that we consider what test on turnover will equate to the assets test. The real question is whether that is the right way to proceed. We have a simple correlation. That is why we are happy to reconsider the point. But the matter for consideration is the principle rather than the data.

Lord Hunt of Wirral: I agree with the Minister that it is consideration of the principle. However, a figure is required in the Bill. Therefore, I am grateful to the Minister for agreeing to make the data research available. I also much appreciate his willingness to consider the matter further. My noble friends and I will ensure that outside organisations are made aware of the Minister's kind offer and that we respond accordingly.

I note what he said on Amendment No. 114. I should like time to reflect on it. He indicated that he was sympathetic to Amendment No. 115. I should like to consider several of the points he made. I shall consult with my noble friend on the Minister's comments on Amendment Nos. 111 and 119. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Kingsland moved Amendment No. 112:

    Page 11, line 7, at end insert—

"( ) the enterprise being the subject of the proposed merger and being unable to meet its financial obligations cannot otherwise reorganise or dispose of its assets with lesser anti-competitive risk."

The noble Lord said: Clause 21(2) sets out two instances where the OFT may not decide to make a reference to the Competition Commission, the first being where the market concerned is not of sufficient importance to justify a reference and the second being where customer benefits outweigh any adverse impact on competition. Both of those are welcome, although the Government or OFT should be required either to

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introduce thresholds or to produce written guidance before the Bill comes into force as to what will be deemed to be not of sufficient importance.

However, in our view, a further instance should be added: namely, the so-called "failing-firm" defence, which is applied in the United States and by the European Commission. In the United States the party wishing to rely on the defence must show, first, that the failing firm cannot meet its financial obligations; secondly, that the failing firm cannot reorganise in bankruptcy; thirdly, that the failing firm cannot find another buyer whose purchase of the firm would pose lesser anti-competitive risks; and, fourthly, that, in the absence of the merger, the failing firm's assets will exit the market.

As far as the European Community law is concerned, the failing-company defence has been applied since 1993. In a case called Kali-Salz/MDK/Treuhand, of that year, although a dominant position was found to be created in the German market for potash, the case was cleared because it was considered that a prohibition would have led to the same outcome in the market as would have been the case if there had been a clearance.

In the Commission's decision the following three criteria were set out. First, the company will go bankrupt within the immediate future; secondly, the market shares of the company will in any case go to the merging party; and thirdly, there is no less anti-competitive way of selling the company. In other words, the main difference between the United States and the EU approach is that the latter imposes the additional requirement that the market shares of the failing firm will in any case go to the acquiring party.

We would be happy with either the EU test or the US test. I say that in the spirit of the Minister's new multinational approach to definitions in the Bill. I beg to move.

Lord Sainsbury of Turville: These amendments would make specific provision for the competition authorities to have regard to the matter of whether a merger involves a so-called "failing firm". Where the situation described in the amendments arises, that will naturally form part of the competition authorities' assessment against the substantial lessening of competition test. Therefore, we believe that the amendments are unnecessary. In fact, by particularising the "failing firms" case, the effect of the amendments could be to narrow the normal application of the substantial lessening of competition test.

Where the authority believes that a firm is to exit the market anyway because of insolvency or other financial difficulties, that will influence the assessment of whether the merger may be expected to result in a substantial lessening of competition. If competition would be diminished to the same degree regardless of whether the merger took place, it would not be possible to find that that merger would result in a substantial lessening of competition.

That is never an easy judgment to make. A number of factors come into play; for example, whether the failing firm's market share is likely to fall to the

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acquiring firm anyway, or be spread among the remaining players in the market. None the less, it is part of the competition assessment itself. We confirmed that in paragraph 126 of the Explanatory Notes which said,

    "whether in the absence of the merger one of the firms would fail and, if so, whether its failure would cause the assets of that firm to exit the market",

that was one of the matters that may be potentially relevant to the assessment of whether a merger will result in a substantial lessening of competition.

Its application will be addressed in more detail in the guidance to be published by the OFT and the Competition Commission. It is worth pointing out that other major merger jurisdictions do not mention the failing firms concept on the face of their respective legislations. In the United States, for example, the issue is addressed in the FTC and the Department of Justice guidance and the same is true of Australia. The European Commission merger regulations also do not deal expressly with the failing firm issue but case law shows that it is a matter that can be taken into account in the assessment of whether a merger results in the creation of a dominant position. We are far from being alone in dealing with these issues in guidance. This is a matter that can be satisfactorily and more flexibly dealt with in guidance and I urge the noble Lords and the noble Baroness to withdraw their amendments.

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